AutoNation, Inc.

Good morning, my name is Brica and I will be your conference operator for today. At this time, I would like to welcome everyone to the AutoNation fourth quarter 2022 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, please press star then two on your telephone keypad. Thank you. I would now like to turn the call over to Derek Feebig, Vice President of Investor Relations. You may begin your conference.

Thanks, Brieka, and good morning, everyone. I'd like to welcome you to the AutoNation fourth quarter 2020 conference call and webcast. Leading our call today will be Mike Manley, our Chief Executive Officer, and Joe Lower, our CFO. Following their remarks, we'll open up the call for questions. Before beginning, I'd like to remind you that certain statements and information on this call, including any statements regarding our anticipated financial results and objectives, constitute forward-looking statements within the meaning of the Federal Private Security Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks that may cause our actual results or performance to differ materially from such forward-looking statements. Additional discussion of factors that could cause our actual results to differ materially are contained in our press release issued today and in our SEC filings. Certain non-GAAP financial measures as defined under SEC rules will be discussed on this call. Reconciliations are provided in our press release and on our website located at investor.autonation.com. With that, I'll turn the call over to Mike. Yeah, thanks, Eric. Good morning, everyone. Thank you for joining us.

2022 was a great year for alternation and four consecutive record quarters. Tremendous results driven by the entire alternation team, and I know many of you are on the call, so my personal congratulations to all of you. Joe's going to take us through the results in detail, but I'm going to just touch on some of the headline numbers. Q4 new vehicle retail industry was up 2%, with us posting a same-store 4% increase over prior year. used vehicle industry declined by 6%, which in my view was significantly driven by constrained used vehicle inventory, which also was a key driver of our used vehicle sales being down 11% in the quarter. Total revenue up year over year in the quarter to $6.7 billion, bringing our full year revenue in at $27 billion, up 4.4%. So notwithstanding the increased availability of new vehicle inventory in a somewhat choppy used vehicle market, both on the retail and wholesale side, our continued discipline approach to unit margin can be seen in the quarter, particularly in our used vehicle margins. This, combined with another strong performance from our customer financial services team, delivered a total variable per unit margin of more than $6,300, which, despite being down from peak level a year ago, was essentially flat sequentially and an acceptable result, in my view, given the market conditions. Now, coming into the year, we've challenged our after-sales teams to consistently grow their business and their performance, and I'm pleased to report that they are making excellent progress as they deliver double-digit sales growth combined with margin expansion. Now, with well-controlled expenses, which Joe will expand on in more detail, we delivered $1.4 billion of adjusted net income for the year with a margin of 5.2%. So when I look back at 2022, I think you can now consistently see, as we've discussed before, the business drivers that I consider are structural improvements compared to pre-pandemic levels. These are clearly CFS, which is driven by our focus on product penetration, our intense focus on sales effectiveness, our drive for operational improvements in our after-sales business, and finally our SG&A control, all of which have contributed to our record results for the year. Now with a focus on cash conversion, which remained at nearly 100%, we generated strong free cash flow for the year in excess of 1.3 billion, and this gave us significant flexibility to allocate capital in a disciplined way. During the year, we generated 1.7 billion in cash from operations. We invested more than half a billion dollars in our business, which included maintenance projects to ensure continued underlying performance from our core business. organic growth investments, which obviously included the additional alternation USA stores, and the acquisition of key assets to expand our business. In addition, in the year, we returned $1.7 billion to our shareholders. Now, that return to shareholders was in the form of share repurchases, and during the year, we bought back 15.6 million shares at an average price of $110 per share, which I think is an excellent investment in ourselves. And given all our activity and our operational performance, we're able to deliver an adjusted EPS result of $6.37 for the fourth quarter, up over 10% year over year. We often on these calls talk about the future, and I think for the foreseeable future, the retail industry will continue to evolve, including our customers' approach to vehicle ownership and usage. And it's an exciting time, frankly, to be in this segment, and we believe the evolving landscape offers many opportunities. AutoNation already has some excellent assets. First and foremost, of course, is our privilege of representing great OEM brands in strong territories, which has enabled us to transact with over 11 million unique customers from nearly 9 million households, another significant undervalued strength of our company. And notwithstanding the fact that we typically add around 300,000 additional customers per year to our database, we know that within our existing customer base, which, as I've already pointed out, is extensive, There are significant opportunities to grow our business by covering a broader part of the automotive value chain, giving us an enhanced opportunity to reactivate inactive customers, improve our retention of new customers, significantly expand the products and services we offer, and increase the frequency within which we interact with our customers. So as a result, in addition to acquiring a select number of additional dealerships, we made three key acquisitions that were focused on expanding and extending the reach of the AutoNation brand. Last fall, we acquired CIG Financial, creating AutoNation Finance and establishing an in-house CFS solution for current and future customers. This business, in addition to its legacy relationships, is currently focused on servicing used vehicle buyers at our AutoNation USA stores, but will expand to our franchise stores later this year. Obviously, as this business grows, we will have an increasing, more recurring revenue stream. Now, this January, we acquired RepairSmith, a mobile automotive repair and maintenance solution. The acquisition expands our range of services and creates meaningful after-sales business opportunities, including utilizing another channel to provide service to AutoNation's existing customer base and introducing additional vehicle owners who have purchased vehicles outside the AutoNation dealer network. RepairSmith also gives our ANUSA brand a unique service proposition and customer experience, offering a range of after-sales products and services that our standalone used car sales competitors, frankly, just do not have. As you know, we've consistently grown our after-sales business, which is more recurring revenue stream, with a high percentage of customers bringing their vehicles into service under warranty. The rate decreases rapidly after the warranty period ends, And RepairSmith now expands our reach and provides a very convenient means for customers to service their off warranty vehicles. Finally, we also improved our digital retailing experience with an enhanced digital storefront and our collaboration with Trucar. All of these activities are targeted and focused to create a stronger, more competitive business that is less exposed to the cyclical nature of the automotive industry and places us in more control of our destiny. And as I said at the beginning, what a great time to be in this segment. And with that, I'll hand over to Jack. We'll take you through the details of our results.

Jack? Thank you, Mike, and good morning, everyone. Today we reported fourth quarter total revenue of $6.7 billion, an increase of 2% year over year. AutoNation's new unit sales increased by 4% in the quarter compared to a 2% increase in the retail SAR. Strong performance in our higher margin premium luxury brands helped support our new unit PBR, which was over $5,600 for the quarter. The overall new market remained very healthy during the quarter as more than half of our vehicles were sold at or above MSRP. This has trended down, but it's still far higher than historical levels. Total used unit sales were down 9% in the fourth quarter, PBR remains fairly constant from the third quarter and reflects its discipline in our pricing strategy. We continue to focus on self-sourcing our used vehicle inventory, which represented 94% of our vehicle acquisitions in the fourth quarter. While good, this needs to increase, and we have ramped up our will-buy-your-car efforts to fuel greater used unit sales. After sales gross profit grew 12% year over year, on both higher revenue and increased margins as we continue to drive strong performance in this area of our business. While underappreciated by some, the recurring revenue stream from after sales alone increased full-year gross profit by more than $225 million to $1.9 billion in 2022 with a strong outlook for the future. CFS performance was also very strong and we continue to lead the sector with PBRs consistently above $2,700. Moving to costs, SG&A as a percentage of gross profit on an adjusted basis was 59.2% for the quarter, significantly below pre-pandemic levels, reflecting permanent structural changes to our cost basis. Year over year, SG&A increased by only 1.5%. As expected in the fourth quarter, SG&A as a percentage of gross profit was slightly higher than recent periods reflecting investments in technology and new business initiatives. Fourth quarter floor plan interest expense of $20 million was impacted primarily by rate and compounded by increased inventory levels. The quarterly expense increased from $11 million in the third quarter and $5 million a year ago. Reported net income for the quarter was $286 million, or $5.72 per share. Adjusted EPS of $6.37 was a record for the fourth quarter and an 11% increase compared to EPS of $5.76 a year ago. The adjustments to this year's EPS include acquisition-related expenses, including upfront non-cash reserves reported at the time of the acquisition of the CIG loan portfolio. Our operating performance and cash flow generation remain very strong, with record cash from operations totaling $1.7 billion for the year. This provides a significant capacity to deploy capital into our businesses and return capital to our shareholders. As Mike mentioned, for the full year 2022, we invested more than a half a billion dollars to expand our business. This included the acquisition of CIG Financial and the Moreland Dealerships in Colorado, expansion of the AMUSA used retail footprint, and meaningful investments to enhance and expand our digital capabilities. We further expanded our business with the acquisition of RepairSmith, which closed last month. We also continued to expand our AutoNation USA footprint, adding stores in St. Louis in November, as well as Austin and Albuquerque last month. bringing the current store count to 15. The AutoNation USA stores play an integral part of both our long-term growth plans and the achievement of scale, scope, and density in our markets to better serve and meet the needs of our customers. We have more than 20 additional facilities currently under development with an expectation that we will open 10 new stores over the next 12 months. We also returned significant capital to our shareholders via share repurchase, as Mike mentioned. During 2022, we invested $1.7 billion, reducing our share count by 25% to 47.6 million shares at year end. Full year share repurchases totaled 15.6 million shares, 4.6 million of which were repurchased in the fourth quarter alone. Thus far in 2023, we have purchased an additional 800,000 shares with more than $1 billion of remaining share repurchase authority. We ended the fourth quarter with total liquidity of approximately $1.8 billion. Our current leverage ratio of debt to EBITDA of 1.6 times remains well below our historical two times to three times range. And looking ahead, we will continue to focus on operational excellence and disciplined capital allocation supporting growth to drive long-term shareholder value. With that, I will turn the call back over to Mike. Yeah, thank you, Joe. Would you like us to do questions?

Yeah, I think that'd be good. Yeah.

Operator, can you remind the audience how to queue up for questions, please?

Thank you. If you would like to ask a question during the Q&A session, please press star then 1 on your telephone keypad. We will pause for a moment to compile the Q&A moisture.

Hello, are you there?

We have our first question from. John Murphy of Bank of America.

Great. Good morning, guys. Can you hear me?

We can. Good morning.

Good morning. Just maybe a first question on the inventory front. Things are slowly returning to normal, maybe in aggregate, but are still a bit tight. But there's some pretty big dispersions between the D3 getting closer to normal and the J3 maybe being very tight. I'm just curious if you can kind of comment where that stands, did the inventory level stand for you and what you think the implications may be for GPUs as we go forward and maybe sort of the dispersion in GPUs in the different brands.

Good morning, John. I'll take this and then Joe can jump in as well. I mean, you're exactly right. If you look at our overall inventory levels and our days of supply, it's still very, very low. Obviously, what we are doing is we track it by all of the OEMs and across all of our brands that we represent, our inventory levels as a percentage of national are still below our sales as a percentage of national sales. So from a balanced perspective, I think even those that have been able to replenish inventory faster than other OEMs, we're still in a good shape. And Joe and I were talking over the last few days, obviously, as we prepare for this and really looking in detail at our inventory. I think the key for us is not absolute numbers of inventory, but how that translates into daily supply as we go through the year. And that obviously brings you on to one of the key questions, and that's what do we think is going to happen with new vehicle volume? So as I sit and look at this year, I think there's strong potential for New vehicle volume under the right circumstances to be above $15 million. And I think we'll end the year with continued low, relatively low, very relatively low, frankly, when you look back at some of the previous year's inventory levels on a day supply basis. And as a result of that, I think there will be some continued mitigation on new vehicle margin. Frankly, if you look at what happened over the period of 2022, really I just see a continuation of that, but somewhat compensated by volume increases across the brand. Sorry for a wandering answer, but obviously these things are all tied together.

Joe, do you want to add anything? I just thought of elaborating the same theme. John, if you look, the days, I hope, of 75 to 90 days of inventory are long in the past. I also think periods of nine days are unsustainable. We're at 19. I think with cooperation from our partners, a 30 to 45-day type normal is a pretty healthy place for everyone to operate. Whether we get to that by the end of this year, I don't know, but to me, that would be a nice level that would serve everyone's interest, I think, exceptionally well. And that's kind of how we're thinking about the business right now. Okay.

Thank you. Okay. That's helpful. And then just a second question, slightly multi-pronged on cap allocation, you know, and human capital allocation. The finance business is going to grow. You know, I just kind of want to understand where that goes and exactly what you really are intending to do there. RepairSmith, you know, is another sort of leg of the stool. that is new and might augment or should augment the after-sales business. And Mike, you were saying something very interesting about reactivating customers, which I'd love to hear what that means and if RepairSmith helps there. And then, obviously, there's the share buybacks. So if you think about, and AutoNation USA, if you think about sort of the flow of cap and free cash flow, to the finance business, to the after sales and the extension there, AutoNation USA, and then buybacks. How should we think about this going forward? Because there are new businesses that are kind of adjacent businesses that are popping up that might be a draw on capital or may not even be that big a draw on capital, may be incremental on their own. How do you think about that?

John, the very first thing that we think about is what is the best use of capital for our shareholders' perspective, and clearly you have seen over the last two years, given the market conditions and the overvaluation of assets out there, the best return was to return it to our shareholders, and we're very clear on that, and our discipline will continue to be with that in mind. Now I'm going to expand on some of the things that you talked about. There are a lot of, really our approach is to firstly maximize the assets that we have in place and in appropriate circumstances to add to that, it will broaden our geographical coverage, but very deliberate. We have an embedded asset in the organization, a very significant customer base that over a long period of years has now built significantly. But the reality is that not all of those customers are active and our share of their wallet is relatively narrow, new lives, sales, use lives, sales and service. But their total spend on transportation or mobility, whichever buzzword you want to use, is very, very broad. So our approach really is to expand our business, our geographical reach, so that we can continue to add more customers to our base understand why customers over time become inactive and that's typically because the age of the vehicle that they have gets beyond seven or eight years and they therefore believe it's the right thing to do for them to move out of a franchised environment or they move outside of a 25 mile radius of our stores and therefore our penetration in the after sales part drops off. RepairSmith is an ideal solution for that because Not only are they incredibly convenient and overcome that geography limitation, they're also able to package their services in a way that they're not underselling their services, but when you value the convenience of them coming to you, it means our customers are likely to think about them as well. And the other consequence of RepairSmith, frankly, is it provides for our AutomationUSA stores a great USP because imagine now not only being able to buy a phenomenal used vehicle backed by automation, you now have access to a team of professional service providers that will give you the most convenient service option in the used car business in our opinion. So when we think about the businesses that we buy, what we're thinking about really is the needs of our existing customers. Not even, if you imagine, not even including the sometimes up to 300,000 customers that are added to our base each year. So our approach really is to reactivate those customers that are looking for a different type of service that is not traditionally provided by a franchise store and we're adding businesses and we're adding both internally, growing them as well as buying them that will help that to make sure that we can reactivate those customers and then broaden the services we offer. Hopefully that's relatively clear in terms of what we are doing and I think the acquisitions that we've made and the businesses that we're trying to grow internally are really directed at that.

Let me just add a kind of boring finance answer to some of this. Because strategically, Mike was I think very clear and articulate as to what we're trying to do. When you match that with the financial or capital strategy, Yeah, we have a first-class problem. We have robust cash flow and a very strong balance sheet. So then the question is, how do we utilize that and maximize the benefit of it? And it's not surprising to most. It's an IRR-driven approach, and we look at what the return is on each opportunity. We have obviously, as Mike mentioned, in the recent past viewed shared purchases as an extremely attractive opportunity. As we look forward, we have found some opportunities that offer very, very compelling returns. And as we think about capital going forward, we will deploy it in a similar fashion in identifying where there really is truly incremental value. And I think you were going to ask about the finance business, and I think we've been very clear that, one, we're going to be delivering this growth, and we will utilize facilities, but we are not funding all of that directly from our balance sheet. as is typical and in some ways similar to the way you think about floor plans. So we're not going to be putting dollar for dollar behind the capital business at the expense of other opportunities. Let me just follow up on that.

I think, Joe, in the past, John, last year when we talked about CIG, it was clear that we are going to grow that business. That business has been around for 35 years. and has been successful during that period. And our intention is to grow that business at a speed that we believe is very manageable on pace with the growth of our ANUSA businesses predominantly. We have good relationships in our franchise businesses with our OEM captives and that will continue. So we really wanted to focus on the growth of ANUSA. So it's going to grow slowly. It will grow deliberately and it will grow in a way that we think is manageable. RepairSmith is a phenomenal startup business. It's a much younger business, full of dynamic people, really trying to forge a new way of trying to provide convenience and great service to their customers. But they are that. They're a startup business. They've grown well. I think they've been very deliberate in terms of their growth. But there's a lot of things that need to continue to happen to make that business grow to scale. So again, don't expect RepairSmith in the course of the next two, three, four quarters to suddenly become a dominant force is about a deliberate, progressive approach to growing our business in ways that we think will deliver over time a really good balanced result.

Mike, just real quick to follow up. It's fair to say that these are good incremental opportunities that are not going to be you know, very material calls on capital that would crowd out, share buybacks that have been a big part of this story, and there's probably room for everything. Is that a fair way to think about this?

Actually, I think that's a more adequate way than I could have put it, so thank you for your answer.

Okay, thank you very much, guys. Thank you, John.

Thank you. Your next question comes from the line of Daniel Inbrether-Stevens. Your line is open.

Yep. Hey, good morning, guys. Thanks for taking our questions. Joe, I wanted to follow up on one of the answers to the last questions. I think you talked about confidence in the OEM partners. Maybe just, you know, the high 30s or 40 days. I'm just curious, what gives you guys the confidence that the OEM partners are going to be disciplined this cycle? You know, historically, if I think through it, maybe they've been a little less disciplined as supply comes back online. So, curious to be what's changing in the conversations, what gives you confidence in that, and then to dovetail onto it, if that is what you expect, kind of where would you expect new GPUs to shake out maybe for the year, or what's the exit rate you're planning on for 2023, just based on that day supply outlook you provided?

I mean, you might think that we actually don't have daily, weekly, monthly conversations with the OEMs about, you know, this complexity of inventory levels. We talk to them periodically so we can understand what their hopes and aspirations are both on a volume market share but also then the production to support that basis. When I look back, what I think has been really interesting is nobody knew what would happen if all of a sudden there was an industry-wide correction of inventory. Nobody had any clue. Everybody was too scared to do it because if you do it as an individual OEM, you get crushed. So circumstances created a situation where everybody got affected at the same rate and there was a reset across the industry. Prior to that, in my life anyway, and I'm not the best example, frankly, of this, but prior to that in my life, your whole concept of of profitability was keep your plants churning as hard and fast and as efficient as you can, churn, churn, churn, churn, churn, churn, churn, churn, churn, churn, churn, churn, churn, churn, churn, churn, churn, churn, churn, churn, churn, churn, churn, churn, churn, churn, churn, churn, churn, churn, churn, churn, churn, churn, churn, churn, churn, churn, churn, churn, churn, churn, churn, churn, churn, churn, churn, churn, churn, churn, churn, churn, churn, churn, churn, churn, churn, churn, churn, churn, churn, churn, churn, churn, churn, churn, churn, churn, ch And that opportunity comes and people suddenly realize that, yeah, you know, this whole concept of supply and demand actually may be something in there. I think it worked for everybody. And I honestly think that people learn. And so I wouldn't say, you know, is your confidence level 100%? Like, do you want to go on to FanDuel and take a bet? No, I actually don't want to do that. But I do believe that, you know, within the different pressures that are on an OEM, remember they have very large union relationships, very large investments. that they recognize that there's a balance. That's what I believe. I think they're all intelligent people. They wouldn't be able to run those complex businesses if they weren't, and I'm hoping that that prevails.

Got it. And then, Joe, any follow-up question on kind of where you expect GPUs to end this year, given that inventory kind of expedition?

So, obviously, I'm not going to predict an absolute level. and obviously there's some talk about the expectation of some level of pressure as inventory builds, but consistent with a view that the business can be run at 30 to 45 days, that's consistent with an expectation that PVRs, while moderating, are going to be above pre-pandemic levels. And that should be a sustainable model provided everyone cooperates in much the way that Mike kind of alluded to. So we're cautiously optimistic, but also very pragmatic about the whole thing.

Yeah, we're not going to... We are cautiously optimistic, but what we ain't going to do is bet the farm on it.

Got it. Makes a lot of sense. Well, maybe just to follow up on something more in your control on the use side of the business, it does feel like you guys have improved your sourcing, kind of customer sourcing the last few years, maintaining higher GPUs, but unit sales were a bit light there, kind of relative to the group, so... Kind of curious, is it becoming more difficult to buy from consumers as vehicle equity normalizes, or what are your expectations there around your ability to continue self-sourcing enough units to drive outside use growth in the future?

I have 100% confidence in our ability to self-source vehicles. I think in Q4, Joe, we were talking about 94% self-source, about 90% anyway. I have absolute confidence in that. But that's not the real answer to the question, I don't think. First, I do think you're going to see an increased new vehicle industry, as we talked about. Obviously, as a large player in the franchise new vehicle retail business, that's going to help us in terms of our sourcing, and that's a competitive advantage against those standalone used car players, which I think has been pointed out multiple times. But the reality is that Roughly 90% of all of the vehicles that are sold, used vehicles that are sold either through franchise dealers or publicly traded used car dealers are under 10 years old. Roughly 90%. Of that, 40% of those vehicles are sold between two and three year old vehicles. And those vehicles have to be put in the market two and three years ago to be available. So it's absolutely clear that unless The sales profile that's been in the used car market in the United States for years is going to dramatically change. We are entering a period of tight supply on three and four year old vehicles, which make up the majority of used car sales. That's going to impact wholesale prices and ultimately retail prices. Margins, I think, are going to be fine. They're going to bounce in and out through the bandwidth that they always bounce in and out. as wholesale prices move, retail prices move, you all know the dynamics. But the reality is that those vehicles are going to be in short supply for a period of time, which will impact those prices. So, you know, for us, what we're going to do is we're going to obviously continue on our strength of we buy your car, continue to maximize the trading that we get through our franchise new vehicle sales, and make sure that what we're doing is appropriately playing in that market to get what we hope is more than our fair share of those vehicles to maintain our sales velocity. We won't overpay. We will maintain, hopefully, a 30-day-ish, 35-, maybe 40-day-ish supply on used vehicles so that we can be reactive. And what that may mean is that our volume may come down, but in response to that, our teams know that if your volume's coming down, your margin better reflect that scanned supply. So that's the dynamic that we're in. It began, I think... A few months ago, it's going to continue into this year. Is it bad news? I don't think it's bad news because if we see the same net price that we're seeing, net transaction price on new vehicles, a solid used vehicle wholesale and retail price is going to help bridge that balance to pay for our customers. So I think it's just the reality of the business and it's one that we'll be facing for the next six months. But it's not bad news. It is what it is. You just react to it.

Really helpful color. Appreciate it, and best of luck. Thanks.

Your next question comes from Rajat Gupta of JP Morgan. I apologize. Our next question comes from Brett Jordan of Jefferies.

Hey, good morning, guys. Hey, Brett. Could you talk a little bit more about RepairSmith and maybe what the scope of services that you can offer on a remote basis are, and are there any regional restrictions there as far as outdoor work or driveway repair, how you envision that?

Yeah, it's a great question, Brett. Obviously, there's a limited range of services and repairs that can be carried out on someone's drive or in a car park or those elements. But it's still incredibly broad if you think about servicing, oil changes, filler change, cabin change, all of those things. They can do repairs, a whole host of different repairs, which includes vehicle diagnostics. They can also provide pre... There's a lot of business. I'll give you one of the things that, for me, is always a great area. There's a lot of business of private... one guy selling a car to another guy or one girl selling a car to another guy, those private sales, some of those people actually wouldn't mind their technician turning up for a relatively competitive fee and doing a quick diagnostic on the car they're buying. It gives them a lot of protection in that C2C market, you know? So there's a whole host of things that RepairSmith are exploring and working on. They also have great relationships with fleet companies because it's incredibly convenient for these large fleet operators to have their van, their transport vehicle service at night when they're not using them. So, I mean, the breadth of services that they can provide is phenomenal. Now add that to all of the physical infrastructure that we have. All of the physical infrastructure that we have. So if you turn up at your house, for example, and you've asked us to come in to do a diagnosis and actually you need new transmission, we ain't going to do that the size of the road. That's clear. But repair smiths now have access to tens of thousands of ramps around the country where they can go and do that for you. So you get the benefit if they're able to repair at your door. They can repair at your door. They can certainly diagnose it for you so you know what you're in. And by the way, if necessary, we can get you to a ramp. So I don't actually see much limitations based upon what you've said, with the exception of obviously the further north you go, in winter, I would say the less likely you are to do what I would call prolonged jobs. But again, if you look at the person's current footprint, our current footprint, how we're going to grow together, that's obviously been part of the thought process.

Okay, great. And then one quick question. You commented that 50% of transactions were at or above MSRP. Could you give us the percent above MSRP and maybe what's the cadence in that mix?

Above MSRP has really not changed, you know, really through the entire transaction. We need to clarify this.

There's not 50, never ever has there been 50% transactions done above MSRP. No, at MSRP. At MSRP, thank you.

No, your clarification is at or above, and I was trying to get the above.

Yeah, so good clarification. My misspeak, very clear, above MSRP through really the pandemic has never been much above three, and today is slightly below 2%. And that is really a company policy and approach, which we've maintained. So I think a 50% or thereabouts at MSRP and less than 2% above. So thanks for clarifying that.

Okay, perfect. Thank you.

Thank you, Brett. Your next question comes from Colin Langan of Wells Fargo. Your line is open.

Oh, great. Thanks for taking my questions. Can you just go into what drove the new GPU decline? I think it was down about $300 quarter over quarter. Is that customer mix? What is causing that decline? And how should we think about that as we go forward? Is that rate going to continue?

I think the reality is that new GPUs are never going to be sustained at the level, and we've been talking about it for a long period of time, that as new inventory levels begin to restore in the franchise networks, that you're going to see a better balance. And I say better because it brings some volume back in, GPUs drop, but ultimately what you're trying to do is maintain an overall level of So it was really driven by the fact that inventory levels across certain manufacturers began to recover, and I would say well-expected moderation of new GPUs. That's how I would describe it, and I think you will see that in this year as well, and I don't think it should come as a surprise to anybody.

Got it. And how should we think about F&I? There were some articles about dealers getting concerned about with rising interest rates, people may scrutinize that line, that payment. Are you sensing much pressure on the quarter? I mean, how should we think about that as the year kind of progresses?

So I think what you'll see, when you get rising interest rates and it gets passed on through F&I rates for 10 staff and its penetration levels begin to drop a little bit, because other providers become more attractive and I think that's what happens. Often it gets mitigated by an extension of the term and or an increase in terms of deposit. The good news for us is our big focus really has been our focus on additional products within our CFS performance so that we have a very balanced performance that, as you've seen in our results, consistently has been at what I think is great levels. So as interest rates continue to go, you see movement up the FICO range, away from deep subprime up through mid and into prime. You see, obviously, the rates passed on. I think last time I looked at the industry, I think about 2% of rate is now embedded in all of the finance that's written in the United States. and you see mitigation and penetration levels from captive or pseudo-captive finance companies. That's how you should think about it, and that just reinforces our focus on the additional products that add value to our customers that are not linked to an interest rate.

The only thing I would add, just to further clarify, more than 70% of our CFS is actually coming from product rather than financing. And as Mike indicated, the real focus on increasing penetration, increasing profit per product is clearly our focus, and I think underlies the confidence we have in being able to maintain that going forward.

Just to be clear, those products, in addition to the financing, those are still embedded into what the person pays, so when someone's shopping the payments. to keep those products for payment would still be higher, right? In most cases, yeah.

I mean, you can buy them standalone, but in most cases, people like to pay it on a monthly basis as well.

Okay, thanks for taking my question. Thank you.

Thank you. Your next question comes from the line of Daniela Hagen of Morgan Stanley. Your line is now open, Daniela.

Hello, this is Daniela Ong for Adam Jonas. So, you know, we heard you talk about the dynamics at play in the used car market. We've heard similar things with our conversations and industry contacts and recent Manheim prints, including the print from this morning. You mentioned tighter supply. Is that the sole driver of this kind of 180-degree turn in the used market? Are there other dynamics at play? Are you seeing anything on changes in consumer demand heading into kind of a macro uncertainty this year? Thank you.

First thing I would add as well, and you're not on because of these deals, but when you talk, I'm giving my regards. There's obviously a range of things that impact it one of which is the availability and as you've seen we saw used car prices begin to drop at the end of last year and that has now kind of mitigated and stopped but it's also being impacted on the demand side because depending on the age and the profile of the customers buying it there is no doubt that what we've seen in terms of interest rate increases also affects the demand side of it. So it's a combination of things. I think my opening comments really were when we looked in, and obviously we do it on a very regular basis, when we look at our performance and we try and identify the key driver, for us it was around that very tight supply and not wanting to buy deeper at the expense per se of gross.

So hopefully that's an answer. Thank you. Thank you.

Your next question comes from Rajat Gupta of JPMorgan. Your line is open.

Great. Thanks for taking the question. I had a question on this SG&A going forward. Obviously, the GPU trajectory is a bit uncertain and hard to predict. How should we think about, you know, the SG&A drop-through as those gross profit dollars come down over the next, you know, 12 to 18 months? And maybe if you're willing to, can you give us a range of SG&A gross profit that you're thinking about for 2023? I have a follow-up. Thanks.

Sure. Was that good talking to you? So SG&A... As you kind of saw in the release and my comments, maintain strict discipline. As we think about it, you obviously have a fluctuation primarily in comp associated with GPUs. Think of the flow through, you know, your SG&A per dollar growth is somewhere between 25 cents and 30 cents per dollar. Beyond that, what we're trying to do is obviously be very efficient in our advertising and marketing, and you can see relatively flat sequentially. And then really controlling the store and corporate overhead, which again was essentially flat sequentially. Result of that, as you can see, is it's still below 60%. I think there is some slight pressure on that going forward, but a strong intent on maintaining our discipline. And then I mentioned the investments, which was maybe 100 basis points. as a percentage of growth this quarter. I don't see that getting much beyond 200 basis points in the course of 2023 as we make what I think are absolutely essential investments to ensure the longevity and wealth positioning down the road. And that can kind of give you a range. I mean, we clearly intend to stay below 65% this year with a target to be at the lower end of kind of the 60 to 65 range. and that will fluctuate somewhat with the GPUs. But the other measures, including overhead and advertising, are elements that we're going to maintain strict discipline on. So that's how we think about it, and that's how we manage it every day.

Got it. Got it. That's helpful, Kalar. Maybe just to follow up on the prior question, know around like the manhattan print and like just you know used car prices turning uh are you able to comment on you know how first quarter or you know for january and you know february uh monster date has been in terms of demand or like just unit comms uh for you you know both you and you i tell you the interest in buying a used car is very strong that converting into

sales is, as I mentioned, still being and will continue to be impacted by availability of inventory, particularly in those age profiles that historically have been the bulk of used vehicle sales for franchised and publicly traded dealers. So we're seeing that. Joe mentioned it in his opening remarks. We, like I think all of our competitors, are recognizing this and we've redoubled our efforts. That redoubling of efforts means that prices are for sure stabilized. You'll see some upward pressure on prices. I think something is going to necessarily impact margin because it's just a relatively short time before that hits retail. But what we saw in Q4 continues in Q1 and it's an area of great focus and we've got our teams focused on that every day. But that's how it started. Hopefully that helps.

No, that's helpful. Great. Thanks for taking the question. I'll get back to you.

Thank you. We have time for one more question. Our final question comes from David Wilson of Morningstar. Please go ahead. Your line is open.

Thanks. Good morning. I guess first looking at the segment income, domestic was down especially hard, about 25%. And just wondering, kind of related to that, you've got a large brand next decline from Ford. But then at the overall segment level for domestic, was there just lack of inventory from Ford or others, or was it more due to unfavorable pricing?

Well, you know, there's no doubt that you had some interesting movements from all of the semesters, both up and down. I think there were three things at play. For sure, inventory. There's no doubt about that. Inventory still was, for the areas, really, that their mainstream brands, I'm not talking about the premium parts of their brands, Lincoln and Buick and Cadillac, but the main parts of the brands you had, pockets of inventory that were not available. We had movements in terms of net price position, and it's incredibly competitive. And I also think all of the OEMs are heading towards the end of the year, and what they like to do, or look to do, is to plan not just the end of the year, but how they're going to start the year. And those dynamics resulted in what we saw. So you've already, I think, seen some of the OEMs talk about how they finished off the year. That will all be wrapped up, and then I don't want to comment for them on how the new year started, but the great thing is that invariably there is not just one silver bullet that did it, and that's why this business is beautifully complex.

Okay, and on service, from a growth perspective, that's a positive outlier there. I'm just curious, are there just a lot of people coming back to the market now who have deferred for a long time? And is the growth mostly customer pay or warranty?

Yeah, growth is coming mainly through customer pay, but it isn't about significant volumes of additional customers coming into your dealerships, our dealerships at least.

I think it really is a reflection of the fact that they have been more miles driven. There's a direct correlation between miles driven and expense driven. keep the vehicles on the road in a safe fashion. So what you're actually seeing is you're seeing the revenue and the gross per repair order actually drift up for a largely stable number of customers that are coming in. It obviously varies dramatically dealership by dealership depending on their penetration of their after sales part, but broadly across the piece that's what you're seeing. And internal work as well, which obviously has an impact It's continuing to improve as well. So broadly, as I said, more miles driven, more repair and maintenance.

And Mike, just a higher level question. Having worked at both OEMs and dealers, I'd love to hear your perspective on contrasting the direct sale model that the EVs are doing to the franchise model that you guys do In your opinion, where is the key value in having the dealer franchise model versus a direct-to-sales model, direct-to-consumer model?

Well, when you buy me four beers and dinner, I'll give you an answer to that question because it's an incredibly complex question. But what I can tell you is, that dealers are an invaluable part of the supply chain. Not only are they connected to the community, but the reality is that customers, given the amount of money that they are spending on vehicles and that price is going up and up, having a relationship that they can trust on a local level where they know that their needs are going to be looked after, whether it is an emergency service repair or something else, at significant value. And at the end of the day, each of these OEMs are establishing their own individual brand position, and those brand positions are enhanced and developed by their dealer bodies. And therefore, the dealers and how they work with their OEMs, in my opinion, is invaluable and will always be invaluable and will not be replaced with a car turning up on the back of a truck.

Well, I appreciate that, and I have a bar in my living room. You're welcome anytime.

Thank you. Just email me the address. It's obviously, and I say, and I don't mean to be flippant, it's obviously a complex question, but I think there are lots and lots of OEMs who have talked about the valuable nature of their dealer body, and working together, our ambition as OEMs partners of our OEMs is to just make sure that the customer journey is as seamless as it can possibly be, that it really does represent the brand that the OEMs have spent years and billions of dollars to develop, and it's done in a transparent way. That means the customer feels that they continue to support it, not just through the purchase, but through the after-sales experience as well. And, you know, there's always moving pieces, but that's my genuine view on it. So with that, I think we are done. That was the last question, right? Yep. Again, thank you all for joining us. Our fourth quarter results, as we've just discussed, were capping off a record year for us. We've really focused this year not just on our earnings but also our customer experience. I'd like to just say to our associates who are on the call, thank you for the things that you have done. You know, there's no doubt we continue to perform in the current environment, but we are also taking the steps that I touched on at the beginning so that we can really be a big player and take part of the industry transformation that is coming. So the expansion of our footprint, the additional transportation solutions, how we thought about our cash flow and the investments that we've made, including return to shareholders, I think are all examples of that. Now, one of the things that we launched in our organization last year with all of our people was a mantra of Go Be Great. And we like that because what it means is it means go be great whether that is in your performance in the business, in the way that you deal with customers, and also in how you get involved in the communities that we're in. And that's a big strength for AutoNation. And I said very openly when I joined this company now nearly a year and a half, maybe a bit longer than that ago, understanding the culture in the organization and how they constantly are looking to give back to communities, whether it's through their Drive Pink initiatives or whether it's just through the engagement that they have in each of the individual markets. It's been, for me, a fantastic part of the organization. And frankly, last year, I think, the guys and girls on Drive Pink, over $35 million. And these things, I think, are important. These things are important. And notwithstanding the fact that this is a quarterly call, I think it's important that we call those things out because it isn't Mike Manley doing that. It had nothing to do with me. It is grassroots from our people getting involved. So thank you all. With that, I'll give you a day's back. Thank you, everyone. Bye-bye.

Thank you. This concludes today's conference call.